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The Impact of Petroleum Prices on Inflation in Sri Lanka

Author:

WTK Perera

LK
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Abstract

This study attempts to measure the impact of changes in petroleum prices on inflation in Sri Lanka. The direct impact is measured through various components in the price indices that have a direct relationship with diesel prices. To measure the indirect impact of changes in petroleum prices on other items in consumer price indices, autoregressive distributed lag model was used. The results reveal that the indirect impact of changes in diesel prices on both Colombo Consumers' Price Index (CCPI) and Sri Lanka Consumers' Price Index (SLCPI) is much larger than the direct impact. Increase in diesel prices by 10 per cent would increase the monthly changes in CCPI by 1.21 per cent during the first month. In the case of SLCPI, the indirect impact of the same change in diesel price was 1.01 per cent with a lag of 2-3 months. Result of co-integration tests reveal that two variables are not significantly co-integrated to form a long-run permanent relationship. These results imply that permitting domestic petroleum prices to adjust gradually rather than sharp adjustments within a short period could minimise the impact of large fluctuations in international prices on domestic price levels. (JEL L97, E31)

DOI: 10.4038/ss.v35i1.1236 Staff Studies Volume 35 Numbers 1& 2 2005 p.107-127

Keywords: inflation 
How to Cite: Perera, W., (2009). The Impact of Petroleum Prices on Inflation in Sri Lanka. Staff Studies. 35(1), pp.107–127. DOI: http://doi.org/10.4038/ss.v35i1.1236
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Published on 15 Oct 2009.
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